What it takes to woo an angel investor

Angel investors don’t come with a halo and wings, but they can seem heaven-sent to an entrepreneur struggling to find financing.

The term comes from the wealthy patrons who finance Broadway plays, but the same kind of financial assistance goes back centuries. “Even Christopher Columbus was backed by an angel,” says Marianne Hudson, executive director of the Angel Capital Association, or ACA, a trade association of angel investor groups.

Today’s angels are private investors who are typically organized in one of two ways to dole out initial investments to entrepreneurs. An alliance is a group of solo angel investors who make decisions individually about which projects to back. On the other hand, investors in an angel fund pool their money and a majority of the group must approve the investment.

Before any money changes hands, expect to spend three to six months in the multistep process, which includes the application, prescreening, screening, the investment meeting and due diligence. Some angels may have a “pay to play” policy for entrepreneurs, but these fees should be no more than a few hundred dollars for applications and no more than $500 for presentations, according to the ACA.

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This may be a good time to approach an angel. The angel investor market rebounded last year, according to the 2010 Angel Market Analysis by the Center for Venture Research at the University of New Hampshire. Total angel investments increased 14 percent over 2009, indicating that angels have significantly increased their investment activity, says Jeffrey Sohl, the center’s director. So if you’ve maxed out your credit cards and decimated your savings to finance your startup, angels might be the answer. Here’s how to get them on your side.

Stay local

The Center for Venture Research found that 90 percent of angel investments were made within a half-day’s travel time from the investors’ homes. The websites of the ACA and its affiliate, the Angel Capital Education Foundation, have angel listings by region. Once you’ve identified the angel networks in your area, check their websites for deal criteria and details about their process. Another model is the Open Angel Forum, which holds free pitch events in various cities. Preselected entrepreneurs are brought together with 20 to 30 angels.

Have the right business

Angels are looking for highly scalable growth companies, says Tim Weelborg, executive director of the Enterprise Institute based in Brookings, S.D. They want to see the potential for fast growth in value and sales. This means so-called lifestyle businesses, such as retail shops or corner delis, usually won’t get funding.

It’s important to show you can compete in a global marketplace. They also want to see a strong management team who can achieve these goals. “We hear that investors invest in the team more than the idea or the project,” Weelborg says. Clearly describe your team’s qualifications to do their jobs. “They have to be confident that the management team can execute the business plan,” Weelborg says.

Give up some control

“Think about whether equity capital is right for you,” Hudson says. “Are you willing to have someone else own part of your company and have a say in strategic decisions?”

On average, angels look for 20 percent to 40 percent of the company. They can invest from $10,000 to a high of $2 million, but the average is usually from $250,000 to $750,000, Hudson says.

Barry Paulk, owner of Quest Executive in Encinitas, Calif., an executive search firm, and a member of Pasadena Angels, says angel investors often will insist on a board seat.

Take advice

Arrogance doesn’t play well with angels. “It’s extremely important that the entrepreneur be coachable,” Paulk says. An advantage of angel investment groups is that many members have been successful entrepreneurs with experience across multiple disciplines and can provide advice and perspective.

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In fact, many angel groups will offer prescreening coaching. “Angels want you to succeed,” says Hudson. “The success of their investment depends on the success of the company.”

Paulk advises entrepreneurs to seek out an angel investor who can vet the project, make sure you’ve met all the criteria and comment on how to improve your presentation.

Talk the talk

“Understand your elevator pitch thoroughly and be able to make within 30 seconds,” says Paulk. “Tell us what you have, why it’s going to change the lay of the land in some fashion, and why we should be interested.”

Lose the jargon and be succinct. The people who get a call back have a good idea they articulate well, strong financials and sound growth projections. Exaggeration is a big no-no. “If your financials aren’t sensible, you’ll lose all credibility,” Paulk says.

Focus on how the product will produce revenue. “Spend time talking about the business because these are business people who are listening to you,” Weelborg says.

Know the way out

Angels want to know your exit strategy. The average length of time angel investors stay on board is five to seven years. Typical exit routes include a sale of the company or a buyback of the angels’ stake by the founder.

“It’s important to define some options early on,” Weelborg says. “Make a case for how it would happen, why it would happen and when it would happen.”

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